A: If you own shares in a company you also have the right to receive dividends which usually take the form of a cash payment. Dividends are paid quarterly, bi-annually or on an annual basis. In practice dividends usually consist of two payments; an interim (consisting of about 25% to 40% of the full-year dividend for the year) and a final (representing 60% to 75% of the full-year dividend for the year). Dividends are split in these ratios because the interim dividend is released mid-yearly and is based on unaudited figures so comes with a greater degree of risk for the company. On the other hand the final dividend is based on audited numbers and will provide a good indication of how the company has fared during the year.
A: Yes, you must buy before Ex date but you don't have to hold till record date. You can sell the next day and you are still entitled to the dividend. That's what ex dividend means - without dividend. So if you hold the day before ex day and sell on ex day the div is yours. But remember on ex day the share usually falls in the market to match the dividend payment. Note that all UK dividends are paid close of business every Tuesday.
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A: Dividends - The morning after a share goes ex-div the price of the share will drop approximately by the amount of the dividend. Regarding how dividends are accounted for in spread betting, it would depend on what type of contract you were thinking of trading. Rolling bets would have dividends credited to your spread betting account by your broker the day that they come into effect. However with future contracts, e.g. September - these would have the dividends already calculated in their price, therefore there would be no need for any dividend adjustments to be added or subtracted on your account.
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Example of credit Dividend adjustment for WMH (William Hill) Rolling Daily at Capital Spreads.
Dividend adjustments are credited to long positions and debited from short positions held at the close of business on the day before the ex-dividend date. If you have a long position on a share spread bet contract you will receive a credit payment on your account on the evening before the share goes ex-dividend. This works in a similar way to if you physically owned the shares and it is done on a pro-rata basis calculated on how long you have held the position for. If you are long, you will receive 80% to 90% (depending on the spread betting company) of the dividend and if you are short, you will be debited 100% of the dividend. You will see in the annual interest column that sometimes it is less than 4.75%. This is the effect of the dividend to be paid - the quotes are lowered to reflect this. Some deals show negative interest - this is where the dividend due outweighs the interest charge.
For example if you were long £1 a point in Barclays you would receive the equivalent credit as if you owed 100 shares. This payment is made as the equivalent net payment you would receive where 20% tax is deducted at source on a dividend. If you have a short position a debit would be made on your account for the full gross amount.
Let's take another example involving Cantor. Cantor pays 80% of dividends on shares which is incorporated into Cantor's spread bet price. Example, if Tesco's cash price was 369 to 369.5 and there was an expected dividend to be paid of 4.2p in October, Cantor's spread bet quote for December would be to 365.4 to sell and 369 to buy.
Also, when companies within an index go ex-dividend this will affect the value of the index and therefore similar adjustments are made for clients holding Rolling Daily bets in the index.
Prices for quarterly contracts already include the dividend. Thus on the day the share goes ex-dividend, the cash price of the underlying should fall by the amount of the dividend (all other things being equal). However, since the quarterly price has already been adjusted, it will not change. Thus, rather than receiving a cash payment into their account, long position holders are protected from the fall in the cash price, thereby receiving the benefit of the dividend (minus tax). Conversely, clients with short positions will not benefit from the same fall in the cash price, thus essentially paying the dividend. A good way to illustrate the treatment of dividends is to look at prices on a spread betting provider's site; where you see the cash price at a higher level than a futures contract or a March price trading at a similar or lower level to a September or December price, then a dividend adjustment will be factored into the broker's future price as compensation. (Obviously, a future price would normally be higher than the cash due to the addition of funding to expiry). Looking at United utilities for example; cash = 453.5, Dec = 458.1, Mar = 450.1. If the dividend paid is different to the spread betting bookie's predicted adjustment, then a cash amount will either be credited or debited from the client account. More information on how Dividends are covered is available here
A: Let's take the case of Barclays PLC
Suppose you own shares in Barclays PLC which pays out two dividends each year; in this case let's assume one dividend in February of 15p net, and another one in August of 18p net. This would give a total return of 33p per share.
If you had bought Barclays at 380p in January 2008, this 33p return would represent an 8.68 return and this income would be taxable at the prevailing income tax rate which leaves you with a 7.12 per cent return (based on an 18% tax bracket).
On the other hand if you had held Barclays PLC in the form of a spread bet, you would have received the full 8.68% indirectly in the form of a capital gain (as opposed to an income) and therefore free from any tax.
Here's how the accounting compares (commissions and financing having been removed for simplicity but are equal in both examples):
Share purchase:
Total Gain: £270.6
Spread bet:
Total gain = £330
A: The reason that only 80% is paid out to clients holding long positions (and not the full 100%) is that you would be charged income tax on a dividend if you received this in reality. The providers do not pay the remainder as tax as they are a member of the LSE and are therefore not charged this.
I opened a 15 point Sept long position on Bradford & Bingley at 174. However now I'm seeing the cash price of the security at 200 at my broker. So how it that my gain is only showing as £135.60 instead of £390 [i.e. (200 - 174) x 15 points]!? Price to sell is showing at 184.5.
A: This is what we have been discussing above. When you originally placed the spread bet you bought it at a discounted rate to what it was trading in the underlying market. The September spread bet price is discounted to reflect the dividends payments which are due to be paid out within the lifetime of the bet. On 19th March 14.3p is due to be paid out as dividends for Bradford & Bingley and on August 20th another 6.7p per share is due to be paid out.
As you don't receive these dividends for quarterly spread bets your spread betting provider has reduced the price by this combined amount - this is the reason that their price is currently lower than the cash price. Also, since you opened the bet the shares has gone up approximately 10p.
A: When there is a change in the expected dividends, the spread betting provider will merely reflect this by altering their price and the price of any open positions. So if dividends are reduced they will reduce the amount of dividends in the price, therefore raising the price. It is important to note that all open positions; be they long or short will also rise.
A: If you were watching IG then you were watching the 'Cash' price with an expiry for Wednesday's close of business which would obviously have the dividend deducted since 'Daily Cash Wednesday' has finance and xd (xd = X Dividend) discounted in the current price.
You were comparing this with a 'Rolling Cash' product which, depending on which platform you use, gets 'Rolled' at a specific time. For instance Capital Spreads 'roll' their markets after the close. This means that Wednesday's xd wouldn't get deducted until the market shut at 9pm Tuesday evening at which point, if you were short, you would get 31 x stake deduced from your account which you would effectively get back once the FTSE gapped lower the next morning. Likewise, if you were long, you would get the dividend paid into your account (although I believe Capital only pay 80% of dividends) - You would of course suffer the 31 point drop on your position when the market reopened.
So the answer to your question is one of 'determination date'. Always be aware of this on a Tuesday evening since FTSE goes ex dividend on Wednesday morning at the open.
Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com or by filling in the form below :-)
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